Shale producers making themselves attractive

February 6, 2015 09:33 AM

The oil industry’s billions in spending cuts are paving the way for a price rebound that will make the best shale producers attractive investments, commodity hedge fund manager Andrew J. Hall told investors.

The current rout is distinguished from the crash in 1986 -- which left crude trading below $25 a barrel for four years -- because OPEC countries today have almost no spare capacity. This time, shale oil will soon be needed to make up for production declines all over the world, pushing U.S. prices to as high as $65 a barrel, the head of Astenbeck Capital Management wrote in a Feb. 2 letter obtained by Bloomberg News.

“Prices at current levels (or lower) are not sustainable for very long,” Hall said in the letter. “The current surplus could thus easily set the stage for a future deficit.”

Major producers and drilling companies are cutting more than $40 billion in spending and firing thousands of workers after crude plunged to half its level seven months ago. The kind of price recovery Hall expects won’t be enough to justify spending on major energy projects needed to boost global output, he wrote.

That will make shale producers a “very attractive investment” as they already operate at lower costs, and those costs are likely to fall further, Hall said.

Astenbeck funds were up 4.7% in January, according to people familiar with their performance. West Texas Intermediate, the U.S. crude benchmark, fell 9.4% in that time. WTI, which has rallied 17% since Jan. 29, rose 3.5% to $52.25 at 8:56 a.m. in New York. It’s still 51% lower than last year’s peak in June.

Dubbed ‘God’

Renowned among fellow traders for his track record of anticipating major market swings and dubbed ‘God’ by some, according to Tom Bower’s 2010 book “Oil,” Hall rose to prominence in 2009 after receiving a pay package of about $100 million while at Citigroup Inc. The trader became a lightning rod for criticism over compensation at bailed out banks.

Hall isn’t alone in pointing out that significant spending cuts are likely to lead to a supply shortage. Abdalla El-Badri, Secretary-General of the Organization of Petroleum Exporting Countries, warned last week that prices could boomerang to $200 a barrel.

Some analysts including Bob Brackett at Sanford C. Bernstein & Co., who since Nov. 3 has recommended buying the shares of U.S. producers EOG Resources Inc., Anadarko Petroleum Corp. and Apache Corp., have said prices will have to rise to meet marginal costs.

Many in the industry don’t see a rebound coming soon. Goldman Sachs Group Inc. on Jan. 11 predicted a $43-per-barrel global crude price for six months and a 12-month forecast of $70. BP Plc Chief Executive Officer Bob Dudley, who said Feb. 3 that it will be “a long time” before oil sells for $100 a barrel again, compared the oil crash of the last few months to 1986, when oil slumped from $30 a barrel to $10 and didn’t recover until Iraq invaded Kuwait in 1990.

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